This is a weekly blog featuring "Billy's Laws of Business". These are common sense laws for business owners and potential entrepreneurs. You will find laws on finance, marketing, start-up, HR and many other business topics based on over 25 years as a business trainer and consultant.
When you are
getting starting in business, you need objectivity.You can fall in love later; once you have an
idea that you are sure has a chance make a profit.But if you fall in love too early, you lose
all sense of objectivity and you cannot make a rational decision.
People in love
are irrational.Consider family
Christmas letters. My friends’ children all have all-star athletes, on the
honour roll, work with the elderly in their spare time and are currently being
considered for a Nobel Prize.(Never let
your own children read these letters – bad for their self-esteem.)You never hear a mother say “My kid is the ugly
one three in from the left.”You see the
point, love is neither objective nor rational.Now in the world of family – this is (to quote Martha Stewart) a good
thing. In the world of the entrepreneur – it is a bad thing.
misunderstand me.You need real passion
to run your business.You just need to
be rational in deciding which business to start.It is a little like courting.You take time to get to know each other.See if you are compatible, and then fall in
love and then get married.I mean, it’s
not as if you appear on a television show, compete for a multimillionaire and
then get married to a complete stranger at the end of the show. (Well not again
A woman asked me
to help her and her husband with the financial plan for a franchise.I have nothing against franchises, but I had
never heard of this one so the brand recognition advantage was clearly not
there. On reviewing the sales estimates,
which seemed high for a first year business, I asked her where these numbers
came from. She replied, “Why from the franchisor’s sales representative.He also told me that this was such a good
location that if we didn’t buy it that he might just buy it himself”.When I dared imply that she might trust a
franchise salesman’s forecast she was insulted. “How could I be so negative – how could I be
so cynical?What kind of entrepreneur was
I?”She had a real rantIn her heart, this was a ‘done deal’ and I
was just raining on her parade.
She and her
husband had fallen in love with this franchise.She had lost all sense of perspective and could see the two of them working
together in their small business and living happily ever after.Eventually she and her husband purchased the
franchise, financed by a loan co-signed by her parents.She went out of business three months
later.I may be a smart-ass, but I am
not an idiot.
At the pre-start
phase, I think that everybody needs to be an optimistic cynic!You need to know where you are going, look
realistically at how you are going to get there and what obstacles will get in
your way!Remember, you don’t cut off a
toe to make a shoe fit; neither should you force a business concept which
cannot work just because you hope it will work.Remember the words of my friend and business planner Elizabeth Lake:
Hope is not a strategy.
Next week, we
shall see the importance of love and passion in business.
Starting a business without doing a
break-even is like snowboarding out of bounds in the fog.You might have the ride of your life, but
there is a good chance you’ll wind up lost, injured or dead!
Everybody has a million dollar idea...that won't work!
Maybe it is the last vestiges of my
education as a “math geek” or maybe it is just my general scepticism, but you
really need to know what you need to do before you get started.The best way to start, in my opinion, is to
do your break-even.Now to many this
will sound like just some numbers oriented accounting crap that gets in the way
of the creative soul of the entrepreneur.Tough luck.
I know what you are thinking, because I
hear the same story over and over.I had
a friend (or relative, or acquaintance’s mothers sister-in-law’s next door
neighbour) who didn’t do any of this accounting crap, and now they are
rich.Well, a girl I went to high school
with won the $1,000,000 national lottery but I still don’t recommend lottery
tickets as a part of a balanced investment portfolio.Doing the break-even doesn’t mean your
business will succeed or not succeed, but it merely tells you what it will take
to succeed. Every business can succeed – but not every business will
The break-even tells you how much
revenue you need to generate to cover your fixed and your variable costs.Your fixed costs are the costs to run the
business – you know the overheads.Overheads include telephone, wages, advertising, automobile office
supplies and the like.These are costs
that you incur whether you make the sale or not.Your variable costs, or your cost of goods,
are the costs to make the product or to provide the service.
I first learned about break even from my
mother.My mother was a nurse. She
equated any purchase around the house to the number of shifts she had to work
at the hospital.If we asked for
anything, Mom would ask, rhetorically of course, “Do you know how many shifts
at the hospital I have to work to buy that?”As soon as I learned to divide by $50 (a Registered Nurse’s take home
pay at the time.) I just answered the question!“Do you know how many shifts at
the hospital I have to work to buy you kids’ new skis?” “That all depends Mom –
3 shifts for the Élan’s, five for the K2’s with Solomon bindings.”“Smart ass!” she replied.(My mother is a bit of a smart ass as
well.After my loving tribute to her at
her sixtieth birthday party responded by saying that birth control should be
made retroactive.Way to go Mom!)
It is crucial that you know what level of
sales you need before you start the business. Once you know this level of sales, ask yourself these three questions:
Will my market support this level of sales? (Market Sufficiency)
Can I physically produce or provide this level of sales? (Practical Capacity)
Can I sell to at least this level of sales? (Sales Strategy)
If the answer to all of these is yes...you may just be on to something. If the answer is no, then you may have to develop a new idea, change your prices, your costs or your market place.
By the way, the break-even formulae are:
Break-even in Units =
(Price – Cost)
Break-even in Revenue=
Gross Profit %
By the way, the
same analysis works for evaluating projects and new expenditures for an existing
company.Remember, it’s hard to succeed
in business if you don’t know the target.The break-even may not be the final destination, but it is certainly one
of the steps along the way.
Next week, working along the same theme, I will post one of the most important business lessons for budding entrepreneurs, the dangers of falling in love too soon.
There is no such thing as self-employment.You may have to write your own paycheck and
you might not make minimum wage, but everybody works for the customer!In the years I have worked in the field of
entrepreneurship, I have noticed that the reasons that people want to start a
business are usually self-centered.They
want to make a lot of money they, want to have independence; they don’t want to
take any crap from an anally retentive boss.What ever it is, most people think of a business start-up from their own
point of view.
Nobody out there cares about your former boss – your desire
for self actualization or your need to have more quality time with your two
cats.Customers care about themselves.Last time you
made a purchase, did you think about how you are helping the business owner
fulfil their dreams?As I type this on
Microsoft Word (which I actually purchased by the way) did I stop for a minute
to think about how Bill Gates made a few more dollars?Of course not.I wanted good software to do word processing,
presentations and spreadsheets.Until
that is actually available, I will use Microsoft Office.
To paraphrase Bill Clinton “It’s the customer stupid!” What do
customers want – or what will customers want. They either
already know they want what you have to offer or you have anticipated what they
will want in the future.
When you think in terms of starting a business, think in terms
of they ways you can help customers.It
might be what they buy-- how they buy -- or where they buy. Everything depends
on your ability to make enough customers happy to allow your business to
I was doing an entrepreneurship workshop and doing my usual
rant about the customer when one of the participants burst out in frustration,
“You make it sound like we aren’t even starting this business for
ourselves.”“That’s right.” I said,
“You start it for your customers!”
This week’s quote is from Theodore Levitt of the Harvard
School of Business.
The purpose of a business is to create and keep a customer.
Hi, I’m Bill Erichson
and welcome to my blog.It’s all about
small business, especially trying to succeed in starting, growing and surviving
in your business.I base my writings on
my years of experience as a business trainer, consultant and general observer
in the small business scene.
As time goes on, and
if I don’t get bored, you I will post up several of ‘Billy’s Laws of
Business’.For the incredibly naïve of
you, these are neither statutory laws nor laws of nature.They came as a result of a little
presentation tip I use in business seminars.If I want to illustrate an important point… or at least a point I think
is important, then I say “As Billy’s Law clearly states…”It was really just a way of drawing peoples’
attention back to the seminar.One day,
somebody asked me if I had written them down anywhere.That gave rise to my ‘laws of businesses’ and
to this blog.
Please don’t take these
laws too seriously.In fact, my
experience shows that for every rule, there are exceptions and that business
rarely black and white, but rather found in shades of grey…at least fifty of
them.(If you are not a bit of a smart
ass…you may not like what you read.)
Please don’t expect an
academic treatise or proper footnotes.If there are fewer than five spelling mistakes per post it will be a
miracle…and that’s with a spell check.I
will make general references to the myriad of material I have stolen through
the years and even make the occasional book recommendations, but the homework
is not mandatory.
In case you haven’t
noticed, I am a bit of a smart ass.Although I don’t take myself too seriously, I take your businesses
seriously.I want all of you (all-ya’ll
as they say in Georgia) to succeed.The
real reason for this blog, and for my laws of business is to get people to
think.Thinking is dangerous as thinking
leads to ideas which lead to change which lead to progress.But we live in a world of change, and these
changes lead to challenges.As small
business owners, must stay sharp and thinking.So here is a quote to get you thinking until I post up the first law…the
Myth of Self-Employment.I heard if on a
Big Businesses survive change
with their size…Small Businesses survive change with their strength.